Estate Planning

Tax Court: Gifts to your own Private Foundation are Deductible

By Gregory Herman-Giddens

This courtesy of Professor Chris Hoyt of the University of Missouri (Kansas City) School of Law:

The Tax Court rejected an argument made by the IRS that a donor should
not be able to claim a charitable income tax deduction for a
contribution to a private foundation because the donor effectively
controlled the private foundation. The case is Foxworthy, Inc. v. Comm,
T.C. Memo. 2009-203 (Sept. 9, 2009). This appears to be the first time
that the IRS has raised this argument in court, and it was soundly
rejected by the Tax Court.

The conclusion is helpful to also resolve questions about claiming
charitable income tax deductions for contributions to donor advised
funds and donor directed funds.

The cases that I have found where the courts disallowed a charitable
income tax deduction because of excessive donor control tend to occur
when the donor retains excessive control over the contributed property
(e.g., failure to deliver the property; retained possession of the
property; etc.). By comparison, the ability of a donor to advise or even
direct the specific charitable organizations that should receive grants
from a donor advised fund (Sec. 4966(d)), a donor directed fund (e.g.,
Sec. 170(b)(1)(e)(iii)), or a charitable remainder trust (Rev. Rul.
76-371, 1976-2 C.B. 305) has never before been an issue to prevent an
individual from claiming a charitable income tax deduction under Section
170. This new Tax Court decision buttresses that result.

Click "Continue Reading" for the excerpt of the Tax Court's opinion of the charitable deduction issue. It was just one of issues that the Tax Court addressed in its lengthy opinion.

[Pages 65 to 67 of the opinion - emphasis added by Hoyt]

G. Charitable Contribution Deductions

The Bells claimed on their returns charitable contribution deductions of
$161,604, $192,377, $87,572, $139,653, and $69,386, respectively for
taxable years 1996, 1997, 1998, 1999, and 2000. Respondent disallowed
the charitable contribution deductions in the following amounts:
$155,001 for 1996, $171,103 for 1997, $77,253 for 1998, $139,653 for
1999, and $62,915 for 2000. The contributions in 1996 and 1997 included
the contribution to the foundation of shares of Northeast Investments
Trust valued at $300,240 for 1996 and $202,320 for 1997. Respondent
disallowed the charitable contribution deductions because Mr. Bell
controls the foundation ...

... IRS Revenue Agent Wilcoxon testified that despite receiving
substantiation from the Bells regarding the contributions to the
foundation, she disallowed the deductions because Mr. Bell controlled
the charity. However, respondent has not cited any authority in support
of his contention that merely having control over the foundation
disqualifies the Bells from claiming the charitable contribution
deductions for the contribution of the shares of Northeast Investors
Trust to the foundation. Although the foundation is a private foundation
controlled by the Bells, control alone is not sufficient to defeat the
deduction to the Bells.24 Control in the context of private foundations
generally is an issue in determining whether a private foundation is
liable for excise taxes because of self-dealing. See sec. 4941.
Respondent, [page 67] however, does not contend that there was any
self-dealing on the part of the foundation or any other violation of the
restrictions or requirements of private foundations, and the record
shows none. See secs. 4940-4945. Furthermore, respondent does not
challenge the tax-exempt status of the foundation.

For the years 1999 and 2000, the Bells claimed total charitable
contribution deductions of $650,592. However, at trial the Bells
substantiated charitable contributions of only $567,886, leaving $82,706
of unsubstantiated contributions. Consequently, we hold that the Bells
are entitled to a total charitable contribution deduction of $567,886.

Footnote 24 - The foundation files Forms 990-PF, Return of Private
Foundation, and the Bells do not dispute the foundation's status as a
private foundation.

 

Full post as published by North Carolina Estate Planning Blog on November 17, 2009 (boomark / email).